pairs to range trade

Broad EURCAD Range Tempting After Adjusting For Volatility

Thursday, 04 December 2008 17:54:46 GMT  |  John Kicklighter, Currency Strategist

A short-term chart of EURCAD price action would reveal a highly volatile pair with momentous swings I price action. However, zooming out, we see a very solid range that has been developed its boundaries after eight months of notable tests.

Why Would EURCAD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.6300 (Range) -Range Bottom: 1.5550 (Fibs, SMAs, Pivot)   ·         If we were looking at a short-term chart of EURCAD, we would see incredible volatility that reflects uncertainty behind growth speculation and changing interest rate expectations. However, pulling back to incorporate 9 to 10 months of price history, there is a very clear range (with fully defined resistance). This too reflects fundamentals with both economies holding up relatively well and a slow drop in rates. Event risk, however, is still a clear problem.   ·         From a technical standpoint, short-term bullish momentum has been the dominate driver over the past week. However, we need to look at the patterns over the longer-term to get a true sense of technicals. Looking at price action back to March, it is clear that 1.6300 is a heavy level of resistance – though upper wicks are a clear issue. Suggested Strategy   ·         Short: Entry orders will be set at half size at 1.6270: easily reachable just below today’s high.   ·         Stop: An initial stop at 1.6420 covers the major weeks from past months, but is still vulnerable. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (150) at 1.6120. The second target will be 1.5800.

Trading Tip – A short-term chart of EURCAD price action would reveal a highly volatile pair with momentous swings I price action. However, zooming out, we see a very solid range that has been developed its boundaries after eight months of notable tests. Our suggested strategy looks to reduce the risk in volatility and approach this setup with a strategy that widens stops and may take a little longer than usual to play out. First and foremost, our initial stop is notionally wide compared to our average 60-80 point stop per lot. Therefore, we will trade at half our normal position size to bring the total risk on the trade back within reasonable limits. Even after these steps have been taken though, our stop is still relatively tight considering the prominence of volatility in tails that we have seen in this region. Cautious traders could widen their stop, but they should adjust their position size appropriately and move the first target to match the risk on the initial stop. This is a position on a bigger scale, but we still have significant event risk tomorrow. Ideally, we want to be entered today and see spot drop 100-200 points back from resistance overnight to give a buffer just in case Canadian employment sparks a bullish drive.

Event Risk Euro Zone And Canada

Euro Zone – After the ECB announced a bigger than expected 75 basis points rate cut today at their regular meeting, the market moving potential of the Euro Zone’s economic calendar dropped off almost completely. Looking ahead at the data scheduled for release over the coming week, there is little risk that the second tier offerings on deck can drive the euro through a major technical barrier. Starting Monday of next week, German industrial production numbers will gauge the health of business activity in the region’s largest economy. The IFO reading from last month has already set the precedence here. The ZEW sentiment survey is perhaps the most leading indicator scheduled; and the additional stimulus efforts made along with stability in the markets could boost confidence.

Canada – The greatest fundamental threat to EURCAD over the short and medium-term is the Canadian docket. The biggest hurdle is also the first one: the November labor report. An expected 25,000 net loss in jobs has been priced in but seems somewhat optimistic given the health of supplementary readings (like the employment gauge in the Ivey report). It will be important to have some buffer from the range extreme before this release – otherwise a breakout could be achieved on high volatility. Things don’t calm down with the weekend either. On Tuesday, the Bank of Canada will delivery its rate decision. A cut is largely expected, but the BoC’s otherwise controlled pace of easing has driven speculation to frenzy levels.

Data for December 5 – December 12			Data for December 5 – December 12
Date	European Economic Data		Date	Canadian Economic Data
Dec 8	German Industrial Production (OCT)		Dec 5	Net Change In Employment (NOV)
Dec 9	German ZEW Survey (DEC)		Dec 9	Bank of Canada Rate Decision
Dec 12	Euro Zone Industrial Production (OCT)		Dec 10	Labor Productivity (3Q)
			Dec 11	International Merchandise Trade (OCT)
			Dec 11	New Housing Price Index (OCT)

 

 

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.

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